Impact of Medicare's prospective payment system on hospitals, skilled nursing facilities, and home health agencies: how the Balanced Budget Act of 1997 may have altered service patterns for Medicare providers

The prospective payment system is one of many changes in reimbursement that has affected the delivery of health care. Originally developed for the payment of inpatient hospital services, it has become a major factor in how all health insurance is reimbursed. The policy implications extend beyond the Medicare program and affect the entire health care delivery system. Initially implemented in 1982 for payments to hospitals, prospective payment system was extended to payments for skilled nursing facility and home health agency services by the Balanced Budget Act of 1997. The intent of the Balanced Budget Act was to bring into balance the federal budget through reductions in spending. The decisions that providers have made to mitigate the impact are a function of ownership type, organizational mission, and current level of Medicare participation. This article summarizes the findings of several initial studies on the Balanced Budget Act's impact and discusses how changes in Medicare reimbursement policy have influenced the delivery of health care for the general public and for Medicare beneficiaries.     

The spillover effects of Medicare managed care: Medicare Advantage and hospital utilization

More than a quarter of Medicare beneficiaries are enrolled in Medicare Advantage, which was created in large part to improve the efficiency of health care delivery by promoting competition among private managed care plans. This paper explores the spillover effects of the Medicare Advantage program on the traditional Medicare program and other patients, taking advantage of changes in Medicare Advantage payment policy to isolate exogenous increases in Medicare Advantage enrollment and trace out the effects of greater managed care penetration on hospital utilization and spending throughout the health care system. We find that when more seniors enroll in Medicare managed care, hospital costs decline for all seniors and for commercially insured younger populations. Greater managed care penetration is not associated with fewer hospitalizations, but is associated with lower costs and shorter stays per hospitalization. These spillovers are substantial – offsetting more than 10% of increased payments to Medicare Advantage plans.     

Medicare-the development of publicly financed health insurance: Medicare's impact on the nation's health care system

It is useful for health care managers to understand Medicare's history and the impact on providers of ever-changing Medicare payment methods. Initially, Medicare payments resembled those of commercial insurance plans and Blue Cross Blue Shield plans. When Congress became concerned about the increasing costs of Medicare, new payment methods were created to limit payments to providers. The prospective payment system, imposed on hospitals in 1987 and later on nursing homes, home health agencies, and other services, has been adapted by commercial plans, Blue Cross Blue Shield associations, and state Medicaid programs. Changes in payer reimbursements require health care managers to adjust the department's charge master and exert more control of departmental costs. The story of Medicare's beginnings and development can provide some insight into the possibility of national health insurance, given the historic and current politics that limit publicly financed social programs. This article discusses the development of Medicare and its administration and serves as an introduction to the complex realities of health care reimbursement policy.     

Medicare Mental Health Parity: A High Potential Change that is Long Overdue

Recent changes in legislation regarding mental health parity in Medicare will revolutionize payment for mental health care and delivery systems. This commentary discusses why this policy change was essential to promote adequate care for populations served by Medicare and to address expected changes in beneficiary, provider, and plan behavior as more equitable payments by Medicare are implemented.     

The Lessons Of Medicare's Prospective Payment System Show That The Bundled Payment Program Faces Challenges

Policy makers have been trying to replace Medicare's fee-for-service payment system for years with approaches that pay one price for an aggregation of services. The intent is to reward providers for offering needed care in the most appropriate and cost-effective manner. Medicare's first payment change designed to accomplish such a change was the hospital prospective payment system, introduced during 1983-84. But because it focused only on hospital care, its impact on total Medicare spending was limited. In 2011 Medicare began a new initiative to expand the "bundled payment" concept to link payments for multiple services that patients receive during an episode of care. The goal of Medicare's current bundled payment initiative is to provide incentives to deliver health care more efficiently while maintaining or improving quality. This article provides a detailed analysis of how Medicare implemented the hospital prospective payment system, how hospitals responded to the new incentives, and lessons learned that are applicable to the bundled payment initiative. The lessons include that any Medicare payment reform needs to continuously respond to the many different components of the health system and that payment reform should be coupled with analogous reforms in private insurance payment, so that providers receive consistent signals to alter their behavior.     

Medicare's bundled payment pilot for acute and postacute care: analysis and recommendations on where to begin

In the National Pilot Program on Payment Bundling, a subset of Medicare providers will receive a single payment for an episode of acute care in a hospital, followed by postacute care in a skilled nursing or rehabilitation facility, the patient's home, or other appropriate setting. This article examines the promises and pitfalls of bundled payments and addresses two important design decisions for the pilot: which conditions to include, and how long an episode should be. Our analysis of Medicare data found that hip fracture and joint replacement are good conditions to include in the pilot because they exhibit strong potential for cost savings. In addition, these conditions pose less financial risk for providers than other common ones do, so including them would make participation in the program more appealing to providers. We also found that longer episode lengths captured a higher percentage of costs and hospital readmissions while adding little financial risk. We recommend that the Medicare pilot program test alternative design features to help foster payment innovation throughout the health system.     

Do financial incentives matter? Effects of Medicare price shocks on skilled nursing facility care

Skilled nursing facility (SNF) spending has been one of the fastest growing categories of Medicare spending over the past few decades, and reductions in SNF payments are often recommended as part of Medicare cost containment efforts. Using a quasi‐experiment resulting from a policy‐driven and facility‐specific Medicare payment change, we provide new evidence on how Medicare payment changes affect the amount of SNF care provided to Medicare patients. Specifically, we examine a one‐time, plausibly exogenous change in the hospital wage index, an area‐level adjustment to SNF payments that affected the majority of SNFs nationwide. Using a panel dataset of SNFs, we model the effects of these payment changes on more than 12,000 SNFs across the United States. We find that increases in Medicare payment rates to SNFs increased the total number of Medicare resident days at SNFs. Specifically, a 5% payment increase raised Medicare resident days by 2.33% at facilities with a 10% Medicare share relative to 0%. Further, the effects were asymmetric: Although Medicare payment increases affected Medicare days, payment decreases did not. Our results have important implications for policies that alter the Medicare base payment rates to SNFs and other health care providers.     

Medicare's Payment Strategy For End-Stage Renal Disease Now Embraces Bundled Payment And Pay-For-Performance To Cut Costs

Since 1973 Medicare has provided health insurance coverage to all people who have been diagnosed with end-stage renal disease, or kidney failure. In this article we trace the history of payment policies in Medicare's dialysis program from 1973 to 2011, while also providing some insight into the rationale for changes made over time. Initially, Medicare adopted a fee-for-service payment policy for dialysis care, using the same reimbursement standards employed in the broader Medicare program. However, driven by rapid spending growth in this population, the dialysis program has implemented innovative payment reforms, such as prospective bundled payments and pay-for-performance incentives. It is uncertain whether these strategies can stem the increase in the total cost of dialysis to Medicare, or whether they can do so without adversely affecting the quality of care. Future research on the intended and unintended consequences of payment reform will be critical.     

The impact of PPS on hospital-sponsored post-acute services: a case study of Delaware Medicare providers

Hospitals were the first providers to experience the change in Medicare reimbursement from a cost basis to the prospective payment system (PPS). In the 1980s, this switch was accomplished through the development of diagnosis-related groups, a unique formula for Medicare reimbursement of inpatient hospital services. During that time, the concern was that, with the anticipated reduced payments to hospitals, adverse impacts on Medicare beneficiaries were likely, including premature release of patients from hospital care resulting in medical complications, increased readmissions, prolonged episodes of recuperation, and preventable mortality. The Balanced Budget Act of 1997 (BBA) mandated the implementation of the PPS for Medicare providers of skilled nursing home care and home health care. This change from cost-based reimbursement to PPS raised concerns that these providers would react as hospitals had done-that is, skilled nursing homes might limit their admission of Medicare patients and home health agencies might cut back on visits. As a result of that, hospitals might be faced with providing care for these post-acute patients without receiving additional reimbursement, and these changes in utilization patterns would be of critical importance to both providers and Medicare beneficiaries. This article examines the decisions that providers made in response to the perceived impact of the BBA. Qualitative data were derived from provider interviews. The article concludes with a discussion of how changes in Medicare reimbursement policy have influenced providers of post-acute care services to alter their level of participation in Medicare and the impact this may have on the general public as well as on Medicare beneficiaries.     

Medicare Payment Reform and Provider Entry and Exit in the Post‐Acute Care Market

Objective

To understand the impacts of Medicare payment reform on the entry and exit of post-acute providers.

Data Sources

Medicare Provider of Services data, Cost Reports, and Census data from 1991 through 2010.

Study Design

We examined market-level changes in entry and exit after payment reforms relative to a preexisting time trend. We also compared changes in high Medicare share markets relative to lower Medicare share markets and for freestanding relative to hospital-based facilities.

Data Extraction Methods

We calculated market-level entry, exit, and total stock of home health agencies, skilled nursing facilities, and inpatient rehabilitation facilities from Provider of Services files between 1992 and 2010. We linked these measures with demographic information from the Census and American Community Survey, information on Certificate of Need laws, and Medicare share of facilities in each market drawn from Cost Report data.

Principal Findings

Payment reforms reducing average and marginal payments reduced entries and increased exits from the market. Entry effects were larger and more persistent than exit effects. Entry and exit rates fluctuated more for home health agencies than skilled nursing facilities. Effects on number of providers were consistent with entry and exit effects.

Conclusions

Payment reform affects market entry and exit, which in turn may affect market structure, access to care, quality and cost of care, and patient outcomes. Policy makers should consider potential impacts of payment reforms on post-acute care market structure when implementing these reforms.Provisions in the Affordable Care Act represent an important restructuring of payment for health care providers. Accountable care organizations and “bundled” payments for acute and post-acute care create incentives for coordinating and reorganizing the delivery of health care by changing provider payment for an episode of care, where care during an episode can be provided across multiple settings. These reforms affect both the average payment received by providers for an episode of care and the “marginal” or additional payment received for the provision of additional services during the episode. These latest policies are a continuation of earlier reforms implementing prospective payment systems for acute care (1983) and post-acute care (1997–2003) that replaced prior cost-based systems of payment. As now, the earlier reforms were conceived to reduce unnecessary utilization, and considerable research has studied how these policies affected health care costs and patient outcomes (e.g., McKnight 2006; Sood, Buntin, and Escarce 2008; Grabowski, Afendulis, and McGuire 2011).Payment reforms impact providers'' profitability and financial risks through changes in both the overall level of payment and the marginal payment for additional services. Consequently, payment reform may impact provider entry and exit, market concentration, and providers'' organizational structure (e.g., vertical integration). Such changes may have important consequences for provider competition, access to care, and patient choice. While prior research has considered the impact of specific reforms on entry and exit, there is limited evidence of how the design of payment systems more generally affects market structure. In this article, we use a series of Medicare payment reforms for post-acute care providers to investigate how payment system design affects provider entry and exit, and the implications for market structure.     

An Analysis of Medicare''s Incentive Payment Program for Physicians in Health Professional Shortage Areas

CONTEXT: Medicare's Incentive Payment (MIP) program provides a 10% bonus payment to providers who treat Medicare patients in rural and urban areas where there is a shortage of generalist physicians. PURPOSE: To examine the experience of Alaska, Idaho, North Carolina, South Carolina, and Washington with the MIP program. We determined the program's utilization and which types of physicians received payments. METHODS: Retrospective cohort design, utilizing complete 1998 Medicare Part B data. Physician specialty was determined through American Medical Association data. Rural status was determined by linking the physician business ZIP code to its Rural-Urban Commuting Area code (RUCA). FINDINGS: There were 2,220,275 patients and 39,749 providers in the cohort, including 9,769 (24.6%) generalists, 21,331 (53.7%) specialists, and 8,649 (21.8%) nonphysician providers. Over $4 million in bonus payments (median payment = $173) were made to providers in HPSAs. Specialists and urban providers received 58% and 14% of the bonus reimbursements, respectively. Two million dollars in payments were not distributed because the providers did not claim them. Over $2.8 million in bonus claims were distributed to providers who likely did not work in approved HPSA sites. CONCLUSIONS: The MIP bonus payments given to providers are small. Many providers who should have claimed the bonus did not, and many providers who likely did not qualify for the bonus claimed and received it. Consideration should be given to focusing and enlarging the bonus payments to specific providers, rather than rewarding all providers equally. Policy makers should also consider a system that prospectively determines provider eligibility.     

Prospective rates for episodes of home health care

Starting October 1, 2000, Medicare began paying providers of home health care at fixed, predetermined rates for services and items bundled into 60-day episodes of home health care. The episode payment rates vary with the patient's clinical, functional, and services utilization characteristics. This new approach was expected to redistribute Medicare payments among home health agencies, extend the cost savings introduced by the Interim Payment System, improve the coordination of services, and reduce the number of unnecessary home health visits.     

An economic history of Medicare part C

Context: Twenty‐five years ago, private insurance plans were introduced into the Medicare program with the stated dual aims of (1) giving beneficiaries a choice of health insurance plans beyond the fee‐for‐service Medicare program and (2) transferring to the Medicare program the efficiencies and cost savings achieved by managed care in the private sector. Methods: In this article we review the economic history of Medicare Part C, known today as Medicare Advantage, focusing on the impact of major changes in the program's structure and of plan payment methods on trends in the availability of private plans, plan enrollment, and Medicare spending. Additionally, we compare the experience of Medicare Advantage and of employer‐sponsored health insurance with managed care over the same time period. Findings: Beneficiaries’ access to private plans has been inconsistent over the program's history, with higher plan payments resulting in greater choice and enrollment and vice versa. But Medicare Advantage generally has cost more than the traditional Medicare program, an overpayment that has increased in recent years. Conclusions: Major changes in Medicare Advantage's payment rules are needed in order to simultaneously encourage the participation of private plans, the provision of high‐quality care, and to save Medicare money.     

Prospective payment and the provision of post-acute care: how the provisions of the Balanced Budget Act of 1997 altered utilization patterns for Medicare providers

The Balanced Budget Act of 1997 mandated implementation of the prospective payment system for determining Medicare payments to skilled nursing facilities (SNFs) and home health agencies (HHAs). This study assessed the preliminary impact of the changes in reimbursement policy on hospitals, nursing homes, and home health agencies in the United States and the mid-Atlantic region, and conducted micro-level analyses of providers in one state, Delaware. An interrupted time series analysis used aggregate and provider-specific data from the Center for Medicare & Medicaid Services. Nationally, providers experienced significant changes in the number of patients, frequency of service, and payment amounts during the years immediately following implementation of PPS. HHAs reduced the number of visits per patient. In Delaware, hospital-owned nursing homes reduced their Medicare utilization, and proprietary facilities increased their utilization. One-third of the HHAs in Delaware withdrew from Medicare participation. Additional micro-level analyses are needed to substantiate the findings of the Delaware case study and to determine why providers adjusted their utilization of services to Medicare beneficiaries.     

The first 3 years of Medicare prospective payment: an overview.

This article provides a synopsis of the available evidence on the impact of the Medicare prospective payment system (PPS) for hospitals over the first 3 years of its implementation. The impact of PPS on hospitals, Medicare beneficiaries, post-hospital care, other payers for inpatient hospital services, other health care providers, and Medicare program operations and expenditures is examined.     

Health care organization and incentives under emerging models of elderly health care

Health providers are rapidly establishing integrated delivery systems to prepare for managed care and capitation. However, acute and primary services for the elderly continue to be reimbursed through DRGs or fee-for-service (FFS) payments. Different incentives and care patterns are described for providers caring for elderly populations and younger, capitated groups. Pilot programs to provide Medicare services to the elderly may become models or foundations for a future, capitated health system for the elderly. Existing models of elderly health care that receive capitated payments are described in this article, including Social HMOs, TEFRA HMOs. and PACE programs. The potential significance of these programs for the synchrony of operational incentives, comprehensiveness of health care, volume of institutional services, and primary care orientation is analyzed.     

Sugar daddy. Most Americans know Medicare as the health insurance program for the elderly, but to providers, it's a jobs program, a capital financier and a safety net

Most Americans know Medicare as the health insurance program that covers the elderly. But to providers it's much more that. The program pays for medical education, finances capital projects and subsidizes care for the indigent. Should Medicare continue making those add-on payments? Is that the program's mission? The debate is intensifying.     

A decade of Medicare's prospective payment system--success or failure?

The growth in Medicare spending for inpatient hospital services slowed following the implementation of the prospective payment system (PPS) due to a decline in admission rates and limits on payment increases. Hospital costs, however, have increased faster than payments. Rather than reducing costs further, hospitals responded by charging privately insured patients more than the costs of their care and developing new revenue sources. PPS also redistributed Medicare payments across hospitals and was associated with increased spending in other settings. The PPS experience leaves policymakers with some immediate challenges and provides insights for the development of health care reform initiatives.     

Accountable care organizations: the case for flexible partnerships between health plans and providers

Under the Affordable Care Act, the new Center for Medicare and Medicaid Innovation will guide a number of experimental programs in health care payment and delivery. Among the most ambitious of the reform models is the accountable care organization (ACO), which will offer providers economic rewards if they can reduce Medicare's cost growth in their communities. However, the dismal history of provider-led attempts to manage costs suggests that this program is unlikely to accomplish its objectives. What's more, if ACOs foster more market concentration among providers, they have the potential to shift costs onto private insurers. This paper proposes a more flexible payment model for providers and private insurers that would divide health care services into three categories: long-term, low-intensity primary care; unscheduled care, including unscheduled emergency services; and major clinical interventions that usually involve hospitalization or organized outpatient care. Each category of care would be paid for differently, with each containing different elements of financial risk for the providers. Health plans would then be encouraged to provide logistical and analytic support to providers in managing health costs in these categories.